By Sam Boughedda
Morgan Stanley analysts maintained an Overweight rating on CarMax (NYSE:KMX) but cut the firm's price target on the stock to $75 from $90 per share in a note to clients on Wednesday.
The analysts told investors CarMax forecasts are "first in" the used car downturn, and the multiple has compressed substantially on a normalized/recovered earnings basis.
"Despite the headwinds confronting the used car market, we remain relatively constructive on KMX as earnings revisions have taken FY23 forecasts to levels less than ½ that achieved pre-COVID (FY ending Feb 2020). Our revised FY23 EPS forecast is 61% below our estimate of normalized EPS of $6.50 which is calculated using the trailing 20-year OP margin average of 5.3% applied to forward year revenues and the current cap structure and interest rate," wrote the analysts.
They added that CarMax has consistently generated over $2,000 GPU — even in the used car market downturn we are beginning to experience — and the company "is self-financing and has one of the strongest balance sheets amongst the dealers."
"Long term, we estimate strong growth in same-store sales along new store openings, allowing KMX to achieve operating leverage, with upside from the omni-channel rollout."
The analysts went on to state that the firm also recommends CarMax as a "hedge" vs. its more cautious views across the franchise dealer complex and the car rental names, which "while also highly leveraged to used car prices, have yet to see the impact hit earnings forecasts."